Economists Stumped as New Home Sales Rise, Mortgages Fall

In a sign of growing wealth inequality and declining middle class purchasing power, more people are buying real estate in America, but less people are getting mortgages.

New home sales surged in the U.S. for the month of August, rising to the highest level seen since just before the global financial crisis began in 2008.

According to the Commerce Department, new home sales jumped 18% from the prior month and 33% above a year ago. The surge in sales was far above analyst expectations, and has left many economists scratching their heads.

In a sign of growing wealth inequality and declining middle class purchasing power, more people are buying real estate in America, but less people are getting mortgages.

New home sales surged in the U.S. for the month of August, rising to the highest level seen since just before the global financial crisis began in 2008.

According to the Commerce Department, new home sales jumped 18% from the prior month and 33% above a year ago. The surge in sales was far above analyst expectations, and has left many economists scratching their heads.

While the housing market has shown uneven recovery in 2014, no indication of a strong demand in housing suggested that new home sales would rise this much in one month. Analysts expected between 400,000 and 455,000 new home sales, far below the 504,000 number reported by the Commerce Department.

While new home sales are up, mortgages are down steeply from the prior week and from a year ago. According to the Mortgage Bankers Association, mortgage applications fell 4.1% for the week ending September 19th from the prior week, while the MBA’s Purchase Index plummeted 16% year-over-year. 

The Purchase Index tracks how many homes are bought with a mortgage, and do not track all-cash property purchases.

Some analysts believe that the ratio of all-cash purchases to mortgaged houses is rising, as more wealthy individuals buy property and middle class Americans find themselves unable to qualify for or afford mortgages. 

Yield Fears and Mortgage Rates

Some analysts have expected the housing market to improve in 2014 as more Americans take out loans at historically low mortgage rates before 2015, when a rise in rates will also make mortgages much more expensive for all but the wealthiest homebuyers who can afford to pay in cash.

With a slowly improving economy, the Federal Reserve has warned markets repeatedly that a rise in interest rates could come sooner than expected. Despite the signal, bond yields have fallen steadily throughout the year, being largely range bound over the summer. Ten-year Treasuries have remained between 2.5% and 2.65% in recent days.

While bond markets have ignored the possibility of higher interest rates, U.S. mortgages have fallen throughout the year, since many move according to the rates that banks can get by buying U.S. Treasuries. 

Economists have expected that homebuyers, fearing that rising yields will cause rising mortgages, will try to lock in a mortgage now and purchasing a new house sooner rather than later. However, data from the MBA suggests that, even with low interest rates, less and less Americans are willing to take on a mortgage to buy a house.

All Cash Purchases Dominating

In several cities across the country, more and more homes are being bought by institutional investors and wealthy individuals, both Americans and foreigners who are looking to park cash. The trend for all-cash purchases has grown for several years throughout the country. 

In several metropolitan areas, more than half of home purchases are all cash. In Las Vegas, Palm Bay (Florida), and McAllen, Texas, over 50% of homes are bought with cash. Florida leads the nation in all cash sales, with over 64% of houses in the Miami area being paid for in all cash.

Many analysts expect all cash purchases to continue to be popular, as high net worth individuals look for more investment opportunities and middle class incomes remain stagnant.